Winnipeg: The Frontier Centre for Public Policy today released Punishing Productivity: Comparing Equalization Programs in Australia and Canada, a study which notes the different make-up of equalization in both countries and also the unintended consequences upon the productive states/provinces.
Written by Frontier policy analyst, Tahlia Maslin, the study looks at the Australian equivalent of Canada’s equalization program. It finds that debates over the usefulness mirror those found in Canada. For example, the Australian state of Victoria claims the current approach stifles the evolution of competitive and dynamic state governments, similar to complaints from Alberta’s minister of Finance Ted Morton, and his recent comments about equalization.
Beyond similarities, however, there are important differences between how the two countries define “have-nots” for the purposes of equalization.
In Australia, there is a two-part calculation for their equivalent of equalization payments. The calculation includes a measurement not only of a state’s ability to produce revenue—and it must demonstrate an average effort to raise its own revenue—but also expenditure needs, i.e., whether a particular state has more expensive costs in delivering public services. Also, Australia equalization assumes a recipient state will make an average effort be efficient in the delivery of social programs.
In comparison, in Canada, the federal government makes payments to less wealthy Canadian provinces to, in theory, equalize provincial capacities to deliver reasonably comparable social programs. However, unlike the Australian system, Canada’s formula is based solely on presumed revenue needs; it does not assume average efforts at efficiency, and does not consider the cost of providing services and how they might vary by province.
Unintended consequences in both countries
· In both Australia and Canada, the benefits that could flow from developing an above-average capacity to raise revenue are equalized away” under the current system.
· This provides a disincentive for provinces (or Australian states) to engage in activities that might enhance revenue capacities.
· Similarly, Canada’s current equalization system provides no incentive for provinces to become more efficient in providing services or to investigate alternative methods of delivering services.
· In effect, the system discourages innovation and economic growth and is subversive of good policy.
The study suggests three possible remedies:
Option 1: Remove equalization altogether
The existing grant pool could be allocated to the provinces on a purely origin basis (each province receives exactly what its citizens contribute to the pool through federal taxes, and there would be no extra compensation in tax shifts to the provinces that lose out).
Option : Change the current system
Equalization should be geared to efficiency in outcomes rather than equity based in
order to promote good public policy and better-performing provinces.
Option 3: Swap equalization transfers for the federal GST and/or other tax room that could be made available from the federal government if any province ends up in a net loss position after the GST transfer.
In the view of the Frontier Centre, the third option is preferable, as current equalization policy provide incentives for less-than-optimal policies in recipient provinces.
Download a copy of Punishing Productivity: Comparing equalization programs in Australia and Canada here.
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